Global macro – one of the major hedge fund strategies – returned to the forefront in 2022 with strong performance across fundamental and trend following strategies amid an increased opportunity set. Returns have been more measured in 2023 year-to-date however we believe conditions remain supportive on a multi-year horizon. As the most flexible hedge fund strategy, global macro typically benefits from economic variability and market volatility. Both rose significantly in 2022 after a decade of easy liquidity via low interest rates and QE programs. JANA believes clients looking to diversify beyond traditional asset classes should consider global macro as a core part of an alternatives allocation.
Global Macro – Cycle resilience
Economist John Maynard Keynes is seen as the founder of the macro principles which launched global macro investing. However, it wasn’t until 1980s and 90s that macro hedge funds started to rise in prominence. High interest rate and FX volatility combined with significant economic dispersion saw hedge fund managers like Paul Tudor Jones, George Soros and Stanley Druckenmiller make outsized returns even as equity markets fell.
“Trading through the cycle”: macro managers will aim to adjust long and short exposures to trade through a market cycle, as we all as react to unexpected macro events:
Today, global macro has evolved and now encompasses various investment styles, such as those based on fundamental views and policy analysis, as well as Trend-following strategies (also known as CTAs or Futures strategies). Views and positions can be discretionary (portfolio manager led) or follow a systematic trading process. Funds take long or short positions across equity, fixed income, currency, and commodity markets, typically using derivatives in order to maintain liquidity, enhance returns via leverage, and retain flexibility.
After a period of high volatility over the 2007/08 subprime crisis a new group of interest rate and FX macro specialists emerged such as Brevan Howard. However, the advent of central banks’ quantitative easing following 2008 led to suppressed market volatility and lower macroeconomic variability, thereby stifling opportunities on which global macro managers would normally capitalise.
This period ended as we entered a new regime of higher inflation, interest rates and greater economic uncertainty which typically suits global macro strategies. With low correlation to traditional equities and bonds, and agnostic to market direction, we believe we may be in a new era for global macro.
Characteristics of Global Macro
There are three characteristics of global macro which make it an attractive addition to portfolios:
1. Macro has low volatility and drawdowns compared to other asset classes and strategies.
Long term Global macro performance against other alternatives strategies has been characterised by lower volatility and lower drawdowns. The historical risk return profile also compares favourably to other asset classes.
Source: Bloomberg, JANA
2. Historical performance as an inflation hedge
Findings from an often-cited paper from Man Group2, ‘The best Strategies for Inflationary times’ concluded that while unexpected or persistent inflation is negative for traditional asset classes like stocks and bonds, commodities have historically displayed positive returns. Moreover, trend following strategies have provided the most reliable protection against inflationary shocks but can also perform well in non-inflation periods (data source: Man Group):
Source: Neville, H., Draaisma, T., Funnell, B., & Harvey, C. 2021. “The Best Strategies for Inflationary Times” The Journal of Portfolio Management 47 (8), JANA
3. A strong portfolio diversifier.
The average correlation of the Pivotal Macro Index with a 40:60 bond/equity portfolio on a monthly basis since 1998 has been 0.3. What is more important is that in times of market stress, the correlation has dropped to be low or negatively correlated – providing portfolio diversification when it is really needed:
NB. 60:40 Portfolio is 60% the MSCI World TR Index and 40% the Bloomberg Global Aggregate TR Bond Index. Source: Bloomberg, JANA Investment Advisers
Global Macro Trade example: US 2-year rates, H1 2022
Short US 2Y rates: In 1H22 inflation started to rise rapidly as stimulus and supply constraints following COVID took effect. This awakened 2Y yields as inflation looked less transitory than expected.
1. Trade idea and initiation: US 2Y bond yields started to rise rapidly into 2H21 as the market caught up with inflation, after being close to zero for six quarters following the stimulus after the Covid pandemic. Discretionary macro funds had already started to position into this trade via swaps, futures and options, leading it to be one of the most profitable trades in 2022.
Source: Bloomberg, JANA
2. Momentum builds: Throughout 2022, the yield rose above its 100- and 200-day moving averages, initiating Trend funds to enter the trade and ride it through to March 2023:
Source: Bloomberg, JANA
3. Catalyst for exit strategy: Into 2023, positioning in US 2Y has got increasingly short, seen in the below chart. This suggests over-crowding in trade that had already run far:
Source: Bloomberg, JANA
Despite positioning above, inflation expectations suggest Fed rate hikes may be reaching an end. Market implied pricing as at Aug-23 suggests the Fed will raise rates 18bp over the next 3 months before cutting in 2024 (see below). If correct, this would imply the 2Y short trade is concluding with yields having risen ~400bp since the end of Dec-2021. Given over-crowding and a fundamental view suggesting a reversal in Fed policy, many macro funds have since exited the trade and crystallised gains.
Source: Bloomberg, JANA
Conclusion: Implementation and role
JANA actively monitors global macro strategies as part of its Alternative research programme, covering the discretionary, quantitative fundamental, and trend following sub-sectors. As the opportunity set has re-emerged, we have seen alternatives investors increasing their portfolio allocations to macro over the past year, and we believe the opportunity set will remain attractive for clients wishing to diversify equity and bond risk.
While some investors will take a direct allocation to one or two managers, styles of macro can be often combined to provide a more balanced approach, i.e. combining an interest rate specialist with a trend-following strategy; or increasingly large allocators are looking to multi-portfolio manager models to provide this diversification and portfolio efficiency. Macro is often combined with other risk-off strategies such as gold, long dated bonds, or TIPS to create a rounded defensive portfolio to complement growth assets.
Importantly, access to macro strategies is no longer limited to large hedge fund investors. Over the past 10 years, fees have come down, transparency has increased, and accessibility has improved. For example, local investors can now access liquid trend following strategies via local AUD trusts. We would encourage investors to research this group of strategies and seek advice on how they may enhance the risk and return profile of their portfolios.
References
- Bollen, N., Joenvaara, J, & Kauppila, M. 2021. “Hedge Fund Performance: End of an Era?” Financial Analyst Journal 77 (3)
- Neville, H., Draaisma, T., Funnell, B., & Harvey, C. 2021. “The Best Strategies for Inflationary Times” The Journal of Portfolio Management 47 (8)
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